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The U.S. Federal Reserve has an important job for its top dog: be able to say with a straight face that it will be able to control inflation. Bonus points are available if you can claim the ability to do this over the long-term. Fed Chairman Ben Bernanke showcased his skills yesterday, claiming that the Fed has everything at its disposal needed to stem inflation for the next few years.
Specifically, he laid out five ways that the Federal Reserve can keep money supply and inflation from spiking, with interest rate management the primary tool. It looks like he's trying to get out in front of inflation concerns early, but only time will tell if he can deliver the goods. For now, keeping inflation contained remains a "top priority."
Among the challenges in front of the Fed right now is the fact that banks have strong reserves -- and they'll need to put that money to work. Over the past year, banks' deposits with the Fed have exploded from $9.3 billion to $772 billion. As they increase their lending, money will enter the economy, stimulating sales and all the goodness that comes from it (jobs, etc.). At the same time, it's like inviting inflation into the economy. So, the fed is considering ways to shrink those bank reserves to prevent an orgy of lending. At the top of the list is the Fed's purchase of up to $1.75 trillion in mortgage-backed securities, housing agency debt, and Treasury-issued securities. If necessary, according to Bloomberg, the Fed would sell some of the securities out in the open market.
The specific monetary situation may be different, but is there anything really new going on right now? The threat of medium- to long-term is looming, and the Fed says it can contain it. Haven't we heard that one before?
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Reader Comments (Page 1 of 1)
7-24-2009 @ 10:03AM
ECIreport said...
Great post. How the people continue to give him (and the Fed) the benefit of the doubt I will never know...
http://ecireport.wordpress.com/2009/07/21/bernanke-testifies-on-capitol-hill-hyper-inflation/
7-22-2009 @ 5:24AM
al coholic said...
Maybe it's time to simply admit that The Fed is just along for the ride in an economy they have very limited control over. With the curtain at the Fed pulled back we can see for ourselves that the so called "wizard" is not capable of saving us all. Fortunately, like Dorothy, we already have that power we just don't know it. It's called financial responsibility.